Workers in a Birmingham button factory circa 1909 - the West Midlands is still the industrial heartland of Britain. Photograph: Topical Press Agency/Getty Images

A budget for growth, for industry and for a rebalanced economy. A budget for regions like the West Midlands, still the heartland of industrial Britain, that has been devastated by the third debilitating recession in 30 years. Labour, the chancellor insisted, was putting into practice the lessons learned from the deepest downturn the British economy has suffered in the postwar era.

In Birmingham, they will wonder why it has taken so long for the penny to drop. As with Manchester, Newcastle, Liverpool and Leeds, the city centre has been spruced up with glitzy shopping malls and upmarket apartments. But the new Selfridges has not compensated for the continued hollowing out of industry; indeed, it is symbolic of the way the economy has changed since Tony Blair scooped up the West Midlands marginals in his landslide victory 13 years ago.

The economic landscape has changed markedly since 1997. Finance has grown stronger and manufacturing weaker. Britain's trade deficit has widened, as has the wealth gap between the rich south‑east and the rest of the country. When Labour came to power, the West Midlands lagged the UK average by 10 percentage points; by 2008 the gap had widened to 15 points.

There are plenty of competing explanations for these trends: globalisation, the strength of sterling between 1997 and 2007, fawning over the City, the belief that the future was the "knowledge economy" or "cultural Britain". Lord Digby Jones, born and raised in the West Midlands, said that when he became director-general of the CBI in 2000 there "wasn't room in the thought space of the government for manufacturing".

Whatever the explanation, there is now a lot of ground to be made up. The loss of more than a million jobs in manufacturing has left the UK economy out of kilter. Labour has presided over an economy that has consumed more than it has produced, imported more than it exported, and speculated more than it has invested. International comparisons show that this cannot simply be explained away by the rise of low-cost rivals in Asia. Germany runs a hefty trade surplus despite its high wages and expensive welfare state, while the United States has retained a big manufacturing sector despite the increasing financialisation of the economy.

A study by the Cambridge economist Robert Rowthorn found that both Britain and the US had experienced productivity improvements in manufacturing in the final quarter of the 20th century, but whereas the US produced twice as many goods with the same industrial workforce, Britain halved the workforce and produced exactly the same.

The recession, despite having its origins deep in the banking sector, has made the structural weaknesses of the economy even more pronounced. Manufacturing output is down by 13% since early 2008, while investment in plant and machinery has been cut by a third. Job losses have been greatest in those regions that have the highest concentration of real rather than financial engineering, leaving them even more dependent on the state for employment opportunities. More than half the net jobs created in the UK after 1997 were in the public sector, with the trend even more pronounced in the old industrial regions. A study by the Centre for Research on Socio-Cultural Change at Manchester University showed that the West Midlands was unusual in seeing private sector employment fall during Labour's first decade in office. The number in work rose by almost 60,000, but this was more than accounted for by an expansion of just over 100,000 in the public sector workforce.

Many of those laid off in manufacturing have found jobs in the service sector, but have had to accept lower wages. If, as many opinion pollsters believe, growth in real incomes is a key determinant of voting patterns, the trends over the past 13 years are troublesome for Labour. In Blair's first term, median average income growth was a robust 2.4%. Between 2001 and 2005, it dipped slightly to 2%. But in the first three years of Labour's third term – pre-dating the pay freezes and the wage cuts seen during 2009 – it grew by just 0.5%.

A study by the Barrow Cadbury Trust found that in Birmingham the squeeze on incomes has been even more pronounced, with median incomes falling by 3.5% between 2001 and 2008, and the incomes of the lowest 25% of workers dropping by 4.5%. High-profile regeneration projects appear to have achieved little, with those parts of the city that were poor at the start of the 1990s still poor today. Jackie Collins, grants and outreach manager for the Trust, said there was evidence of economic distress rippling out from the ethnically-diverse inner city to the predominantly white working-class districts on the outskirts.

Ian Austin, MP for Dudley North and minister for the West Midlands, said the problems of the region go much deeper than the recent downturn: "There are structural problems which date back 30 years or more. The central thing is skills. There are fewer graduates working in the region than in other parts of the country, and fewer professional and managerial positions. We need more investment in skills and we have to drive up school standards."

Austin believes the long tradition of craftsmanship in the West Midlands could make it the manufacturing hub of a low carbon economy. "The new industrial revolution offers a chance to turn things around," he said, noting that £40m has been invested in a new advanced manufacturing sector in Coventry. And while leading companies such as Rover have closed and others, such as Cadbury, have been taken over, some firms are thriving. Modec in Coventry and Zytek in Lichfield are both world leaders in the manufacture of zero carbon and hybrid vehicles.

But Britain has never been short of innovative companies, neither has it lacked world-class companies, such as GlaxoSmithKline and Rolls-Royce. The problem, exposed brutally over the past 13 years, has been that there are few sectors where the UK is truly internationally competitive and there is not much beneath the cadre of top performers.

Turning round decades of decline is likely to be long and difficult. Businesses complain that graduates and school leavers are inadequately skilled and that the banks have starved them of cash. Alistair Darling sought to address this in yesterday's budget; the Capital Growth Fund is designed to help the 32,000 small and medium-sized businesses struggling to attract finance.

Jones said that what Britain has lacked is a strategy for manufacturing. "Birmingham and the West Midlands would be at the heart of that strategy. It doesn't mean give everybody money, it means building up capacity. The politicians of all parties have mistaken investment in the future for a bailout."